Record Keeping, The Paper Work

The Real Estate paper work

Real estate investing requires that you keep records for long periods of time. You need records to be able to prepare your taxes, determine your profits, and to use when deciding what to do with your properties. Plan on keeping records on each of your properties until five years after you have disposed of the property. A lot of paper work is generated during a real estate transaction. Save everything, it will save you time, and money over the years that you own a property.

I am not going to get onto all of the different paperwork items that you might run across. The list is too long, and I am not sure I have the expertise. I do recommend you get a textbook called modern real estate practices (for your state), it will help you in this area. What I am going to do, is tell you how I do my record keeping, and why I do it this way. I believe in doing the least amount of paper work possible, and in keeping the paperwork filing system simple.

NOTE: The information provided is my opinions, and not tax, or legal advice,. Check with your attorney or CPA for any legal or tax advice.

Files

I set up a file for each property. The file contains a copy of everything involved in purchasing that property. I.E., The file contains the "offer to purchase" contract, a copy of the recorded deed, closing statement, any loan or other applications, inspections, surveys etc. When the file is complete, I put it all in a large envelope and file it in a fire troff file cabinet (plan to keep the information forever).

I create another file folder for each property, each year, and record on the outside of the folder all rents received on that property. On the inside of the file, throughout the year, I put all the receipts for expenses or repairs that pertained to that property. On the inside cover of the file folder I write down the date, who was paid, why, and the amount paid, just in case a receipt gets lost. At tax time, it is a simple matter to add up the rent receipts and the pay outs (See schedule "E" below).

Copies of my Income tax returns are filed by the year, as are my financial statements.Â

Check Book

I have a bank account set up in my name, with "rental acct." added after my name. I use this account exclusively for rental property transactions. I pay everything possible by check. At the end of the year I can tell where the money went, and I have a record of any money I take out for personal use.

Safe

I have a safe and keep all deeds, and recorded paperwork in the safe. I also keep the check book there. A safety deposit box at a bank would work for storing property deeds
Schedule E

Each year you will fill out an IRS Schedule "E" to report your income or loss to the IRS. It helps to set up your property records with the same information that is on the Schd. E.

Actually I let Turbo-Tax do it.

The Schedule "E" list includes.

The Properties address

INCOME: The rents received

EXPENSES:
Advertising
Auto and travel
Commissions paid
Insurance
Legal and professional
Management fees
Interest paid
Repairs
Supplies
Taxes
Utilities

Other expenses: Such as amortization cost, signs, depletion etc.

(Depletion example: Suppose you had an A/C go out in one of your rental units, and you replaced it with a new one that will be depreciated over a five year period, and the old one was not fully depreciated yet. You can deduct the unused depreciation on the old unit as depletion)

Set up your files or ledgers with the categories listed on the schedule "E" and it will make filling our your tax forms easier.

Depreciation

Depreciation is taken on IRS form 4562. Depreciation of residential property is 27.5 years, and non-residential real property is 39 years. You can depreciate the buildings but not the land. Check with your CPA, as parts of the building may be able to be depreciated faster, using component depreciation. The IRS lost a tax case concerning component depreciation. You can use this faster method if you keep the proper records.

If the property was appraised, the lands value as compared to the improvement value, is most likely shown in the appraisal report. If you did not get a copy of this report, request it from the lender (you paid for it). If you do not find the information there, ask your CPA for the most common percentage used for the land value.

Depreciation offsets (lowers) the amount of rent received that you have to show as taxable income. When added to the expenses, you might have a taxable loss to reduce any earned income.

When you sell a property you will need to know your cost basis to determine what your taxable profits are. (Always do a tax free trade if you can to postpone the taxes, maybe forever) Your cost basis is what you paid for the property, plus any improvements added to the property over the years, plus any expense necessary to get the property ready to sell, less any depreciation taken over the years. Subtract that number from the net sales price and you have taxable profit. For this reason you need to keep all property records for five years after the property is sold. If the property was part of a like kind exchange, (trade), keep the records for five years after the traded for property is sold.

Schedule C

Schedule "C" is the IRS form used for reporting profits or losses from a business. This is the form you would use to report business use of your home office. When setting up your income and expense record books, if you follow the schd. "C" format and categories, it makes filling out the end of year tax reports much easier.